Choosing a well-known, established retailer isn't necessarily a guarantee that suppliers will be paid on time - or even that they will get paid what they were promised. As Matalan, New Look and Marks & Spencer get named and shamed for changing their supplier payments, Rebecca Danton explores why so many UK companies get paid late, the devastating effect this can have and how the trend can be reversed.

Budget chain Matalan has recently been at the receiving end of criticism over the way it treats its contractors. The Forum of Private Business reported last autumn that Matalan had demanded a 2% discount from suppliers to help it overcome "difficult trading conditions."

Perhaps predictably, Matalan argued it was a "one-off contribution" and suggested it was nothing compared to what other retailers had asked for from their suppliers.

"…Matalan did what many other retailers have done," a Matalan spokesperson told just-style. "If we don't get lower prices, we don't get higher turnover and everybody misses out."

But on top of the discount, suppliers were also notified they would have to begin paying for the number of invoices submitted to the firm - not small change if the retailer is the main contract. And all of this occurred shortly after Matalan reported a pre-tax profit of more than GBP36m (US$67.24m).

Another offender, New Look, decided to delay payments to suppliers by 15 days. It blamed the delay on "increased investment in new space," namely the acquisition of 34 ex-Littlewoods stores, a UK 'space-opening programme' and new stores in Belgium and France.

Fellow high-street retailer M&S inferred its 5% cut from payments was justifiable because it gave suppliers so much business. Others argued it was due to an extravagant advertising campaign starring high-profile names such as supermodel Erin O'Connor.

This was the not the first time M&S' suppliers lost out. The retailer had already knocked down prices by 3.75% back in September 2004 and then by another 2.5% in April last year as CEO Stuart Rose fought to get the flagging company back on track.

Delayed payments
But these retailers aren't they only ones who engage in payment changing. According to the Better Payment Practice Group (BPPG), "a significant minority" of retailers delay supplier payments, with one in ten UK companies feeling no obligation to pay on time.

"It used to be worse, and then got better. But only to a point," says Matthew Knowles from the Federation of Small Businesses. "Legislation has helped but payment time has now stagnated at 46 days."

And retailers appear adept at finding ways to avoid keeping to payment terms.

Supermarket giant Tesco claims it has no payment creditors, Knowles tells just-style, when in fact it pays its bills through a small subsidiary - therefore avoiding publishing credit details. "It's all loopholes. Large companies are very good at exploiting them," he says.

This leads to an estimated 10,000 UK-based small- and medium-sized enterprises each year waiting for cheques and small firms waiting for GBP6.1bn of owed payments.

But waiting for payments isn't just annoying and inconvenient. A recent survey of members from the UK's Forum of Private Business showed 60% of respondents believed late bill payment restricted their company's growth.

On top of this, late payments are thought to cause tens of thousands of businesses to close each year.

"The BPPG believes that uncertainty over when they [companies] will get paid is a major problem for businesses because without control over when money is coming in, it is impossible to make plans for day-to-day business expenses, let alone business growth," Clive Lewis, head of small and medium business issues at The Institute of Chartered Accountants in England and Wales, and a member of BPPG group, told just-style.

Ruined reputations
But, as the BPPG points out, late payments don't only hurt suppliers; they can also have adverse effects on the very companies that inflict them. Paying later than agreed can damage companies' reputations - partly because it suggests the buyer is in financial difficulty.

Additionally, any bad impact on suppliers can mean complications for the buyer. And generally, the bilateral relationship is likely to be tarnished.

Moreover, once payment terms are changed there seems to be little opportunity for suppliers to challenge retailers.

Forum of Private Business spokesman Matt Hardman told just-style recently there is little affected suppliers can do at present, because the retailers that engage in payment changing will just drop them if they complain, most likely losing themselves a large proportion of their business.

Knowles from FSB echoes this: "A lot of large companies use smaller businesses as free credit, but they can't take them to court because they run the risk of losing their contract.

"They don't have a choice but to comply if they're a big contract, even if they have to pay out. Very few will actually go public."

Business protection
But that's not to say there's nothing businesses can do to protect themselves from payment changes.

Lewis says "…it is essential that businesses help protect themselves by demonstrating less tolerance to late payers by establishing a strong credit management policy."

This, he explains, involves checking new customers' creditworthiness, setting strict limits and keeping to them, initiating and maintaining a close relationship with the customer - and especially buying and accounts personnel - and reviewing payment records at least twice every year.

"Businesses are in business to make money, not just to win contracts, so it is essential to weigh up the pros and cons of taking on new business and that includes finding out if the business will pay on time," he warns.

Retailers, on the other hand, should keep to initial payment terms, explain procedures to their suppliers and make sure that procedural issues do not delay payments.

Interest charges
On top of this, The BPPG says that the threat of charging interest is potentially an effective deterrent against late payment - but it is one currently underused.

"A recent poll by the BPPG found that half of UK firms surveyed do not know how to calculate late payment interest."

It adds: "We believe that the statutory right to interest and compensation under the late payment legislation is an important deterrent to late payment and businesses should make full use of it."

The FPB, meanwhile, is calling on the government do more to help small firms understand their rights on late payment and to give more precedence to the issue.

It is lobbying for businesses to receive compulsory compensation after 30 days - and for obligatory higher levels of transparency regarding payment and credit issues.

In addition, it is clear the government/business initiative Payment Practice Code is a positive step forward. More than 1,400 companies have already agreed to commit to prompt payments and the organisations now signed up to it represent about 20% of the UK's gross domestic product.

One thing is clear: it is vital that suppliers and retailers alike wake up to the importance of keeping to payment terms.

As the BPPG points out: "Paying on agreed terms injects more money into UK industry; existing suppliers are kept healthy; new firms are encouraged to compete in the supply arena; buyers benefit from a wider range of supply sources and the UK economy becomes more competitive in the world market."